Health Minister Mark Butler revealed the changes to the $50 billion scheme in a major address to the National Press Club on Wednesday.
As part of the changes, standardised assessments will be rolled out with a list of diagnoses no longer the sole standard of access.
Mr Butler said he hoped the revised entry rules for the NDIS would be in place by the beginning of 2028.
The government is aiming to reduce the number of people on the NDIS from about 760,000 to 600,000 by the end of the 2020s, lower than forecasts of more than 900,000 at current expansion rates.
An advisory group, the disability community and states and territories will help formulate the eligibility tests.
Those who don't meet the benchmark for inclusion will be directed to other support services.
"(People have) been told this is the only program available or that this is the help their child needs," Mr Butler said."It is our responsibility to make sure that in the future, these Australians are pointed to the right place."
The changes would also bring the average cost of plans down to $26,000 per year for each participant, down from $31,000 in 2026 and in line with figures from 2023.
The overall cost of the NDIS is forecast to reach $70 billion annually by 2030, but the minister said the growth would instead be restricted to $55 billion by the end of the decade.
Spending rises of only two per cent per year - well below the current rate of inflation - were targeted for the coming four years.
Previous changes sought to get spending growth down to eight per cent per year after an agreement struck between the Commonwealth, states and territories.
Mr Butler said a wider overhaul of the NDIS was needed to bring the scheme back to its original purpose.
"It's a hard decision, but it's the responsible, right decision for us to take as a government, because we cannot see this scheme continue on its current path," he said.
"It will be unsustainable from a taxpayer point of view, but much more importantly, its community support.
"Its social license is slipping away, and we can't let that continue to happen."
Registration for NDIS providers will also be mandatory. About 10 per cent of existing providers are registered.
A $200 million fund will be set up to rebuild capability in the disability sector among community organisations.
Costs will be reduced for third-party providers by 30 per cent with the goal of providing NDIS participants a shortlist of approved groups to choose from.
"Many of these people provide valuable support to participants, but others have no qualifications or background in disability services and seem more interested – too often – in clipping the ticket," Mr Butler said.
Laws putting in place the NDIS overhaul will be introduced in May, when federal parliament returns for the budget.
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